GUIDES & RESOURCES

Tips For Calculating Your Income Protection Insurance Coverage

Should the worst happen and you get sick or are injured, income protection insurance could provide a financial safety net for you and your family.

*iSelect’s partnered with Lifebroker to help you compare a range of Income protection Insurance policies. Not all policies are available at all times or in all areas. Any advice provided on this website is general in nature and does not consider your situation or needs. Please consider if any advice is appropriate for you before acting on it. Learn more.

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If you do have income protection insurance, you could receive up to 70% of your regular income , subject to the terms and limits of your policy. So it’s a great back-up to your existing benefits, such as employer sick leave, and can even be funded through your super. What’s more, it provides you with the security of not having to worry about the dreaded “what if?”.

How do I determine the amount of coverage I require?

If you’ve determined that income protection makes sense, and you’ve thought about your existing resources, it’s time to start working out how much cover is suitable for you.

This process is all about listing your weekly living costs and figuring a minimum monthly amount you’ll need to cover expenses. This can include costs such as:

  • Mortgage or rent;
  • Groceries;
  • Car expenses (including petrol, insurance and maintenance);
  • Utilities, like electricity, water, gas, phone and internet;
  • Credit card payments;
  • School fees;
  • Other insurance policies.

Also remember that income protection policies will only cover up to 70% of your regular monthly income, subject to the terms and limits of your chosen policy.

Who is Income Protection relevant for?

One big thing when to keep in mind when considering this question, is that taking out income protection insurance can make more sense to some people depending on their specific circumstances.

If you fit into any of the following categories, then income protection could be a financial product worth considering:

  • You’re self-employed or own a small business owner, meaning you can’t rely on sick leave or annual holidays.
  • You have a family that depends on your income.
  • You have a debt, like a mortgage, that you need to make payments on whether you’re working or not.

What other factors are worth considering?

The first thing to think about will be how long you’ll be able to pay your unavoidable expenses if you can’t work. When considering this, remember to factor in whether you have:

  • Your partner’s income;
  • Any savings;
  • Total or permanent disability or trauma insurance, that could help replace lost income;
  • Private health insurance to help cover any medical expenses;
  • Financial support from family or friends.

How are income protection premiums calculated?

When assessing the risk in insuring you and calculating your income protection premiums, insurers consider a whole range of factors to determine how much risk you carry. These can include:

  • Age: The older you get, the more likely you are to fall ill. For that reason, premiums often increase with age.
  • Gender: Women are considered more susceptible to pre-existing medical conditions, such as heart problems and pregnancy complications
  • Smoking Status: The bad news: if you smoke, you could pay more for income protection. The good news: if you give up, you can have your premiums changed to non-smoker status after two years.
  • Pre-existing medical conditions: With any existing condition, your insurer will need to know the nature of the condition and any current treatment you’re receiving. Unfortunately, some conditions automatically exclude you from cover.
  • Your occupation: Obviously some jobs come with greater risks than others. Premiums will reflect the relative level of danger for your occupation and the actual duties you perform.
  • Your lifestyle: It isn’t just jobs that can be dangerous. If you like your pastimes on the wild side—cave diving or bull riding, for instance—again your premiums will be affected.
  • Waiting period: The quicker you want your cover to apply, the higher premium you’ll typically pay.
  • Benefit amount: The longer the period your benefit covers, the more you could be charged.
  • Payment schedule: If you’re happy to make an annual payment, you could be offered a discount.

Stepped or level premiums?

When you take out income protection insurance, you can generally choose to pay either stepped or level premiums.

Stepped premiums

Stepped Premiums mean that the amount you pay in premiums increases each year as you get older. Stepped premiums are re-calculated based on your age at each policy anniversary. This generally means your premium rate will start lower than the level premium structure, but will go up each year as risks increase.

Level premiums

Level premiums can give you more certainty on the future cost, especially if you’re planning to keep your cover for many years. The premium is based on your age at the start of the policy. Premiums can increase if you have chosen to apply inflation protection or indexation to your policy. Premiums can also increase if you make changes to your policy or if the insurer increases the premium rate across all policyholders. Level premiums generally end at the policy anniversary before age 65 and will change to the corresponding stepped premium for your age until your policy expiry.

How do I find an income protection policy that’s suitable for me?

At iSelect, we’ve partnered with LifeBroker to make it easier for iSelect customers to compare income protection products and find a suitable policy. Click here to get started online.

Last updated: 29/09/2021

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